April 16 (Bloomberg) -- Philadelphia Federal Reserve Bank
President Charles Plosser said an eventual withdrawal of Fed
stimulus should include sale of securities on its balance sheet
and a return to the federal funds rate as the main policy tool.

“I am uncomfortable declaring at this point that we would
not engage in sales” of securities, Plosser said today in a
speech in Beijing. “We should return to an operating framework
in which the federal funds rate is our policy instrument, we
should shrink the size of our balance sheet consistent with this
framework and we should shorten the duration and return the
composition of our portfolio to all Treasuries.”

Chairman Ben S. Bernanke said in congressional testimony in
February the Fed will review its exit strategy and may decide to
hold bonds on its balance sheet to maturity. The Fed is buying
$85 billion in Treasury securities and mortgage bonds each month
to stoke growth and bring down unemployment, pushing its balance
sheet to a record $3.23 trillion.

Plosser, in remarks prepared for the speech at a conference
co-sponsored by the San Francisco Fed, said he backs a plan for
withdrawing monetary stimulus adopted by the Federal Open Market
Committee in 2011. He does not vote on policy this year.

Before reducing accommodation, the Fed should raise the
discount lending rate to bring back to pre-crisis levels the
spread of the rate over the target interest rate, Plosser said.
He also said the Fed could reinvest maturing long-term assets
into shorter-term assets to gain more flexibility in managing
its balance sheet.

Exit Plan

Plosser didn’t discuss the current economy, other than
noting that it’s grown stronger in the two years since the
central bank announced the exit plan.

“Economic conditions have improved, but the pace has been
uneven,” he said.

The Philadelphia Fed chief said one concern with asset
sales is that they could result in losses and reduced
remittances to the U.S. Treasury.

“Although negative remittances would not impair the Fed’s
ability to implement monetary policy, they may impose
significant political risk for the institution,” he said.

Plosser, 64, became president of the Philadelphia Fed in
August 2006. He was previously dean of the graduate school of
business administration at the University of Rochester in New
York State. The Philadelphia Fed will next have a vote on policy
decisions in 2014.